Assume that on January 1, 2020, Elmer’s Restaurants sells a computer system to Liquidity Finance Co. for $680,000 and immediately leases back the computer system. The relevant information is as follows.

1. The computer was carried on Elmer’s books at a value of $600,000.

2. The term of the non-cancelable lease is 3 years; title will not transfer to Elmer’s, and the expected residual value at the end of the lease is $450,000, all of which is unguaranteed.

3. The lease agreement requires equal rental payments of $115,970 at the beginning of each year.

4. The incremental borrowing rate for Elmer’s is 8%. Elmer’s is aware that Liquidity Finance set the annual rental to ensure a rate of return of 8%.

5. The computer has a fair value of $680,000 on January 1, 2020, and an estimated economic life of 10 years.

Instructions

Prepare the journal entries for both the lessee and the lessor for 2020 to reflect the sale and leaseback agreement.